A 6% Convertible Bond Has a Face Value of $1,000

question 101

Multiple Choice

A 6% convertible bond has a face value of $1,000 and a 6-year maturity. The conversion ratio is 13. Nonconvertible bonds with comparable risk are yielding 7%. The common stock is selling at $76 a
Share. What is the value of the conversion premium?

• A) 3.59%
• B) 3.61%
• C) 3.68%
• D) 3.75%
• E) 3.83%

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Definitions:

Nonfactor Risk

Nonfactor Risk, also known as specific or idiosyncratic risk, is the part of an asset's risk that is not correlated with overall market movements and is unsystematic.

Security Market Line

A graphical representation in the Capital Asset Pricing Model that shows the relationship between the expected return of an investment and its beta, representing risk.

APT

Stands for Arbitrage Pricing Theory, a model that predicts a security's returns using the linear relationship between its expected return and macroeconomic factors.

Factor Intensity

The measure of how much of a certain factor of production (labor, capital, etc.) is used in the production of a good or service.